President Obama taking questions from business leaders at the quarterly meeting of the Business Roundtable, Washington, D.C., December 5, 2012

Two years ago, Treasury Secretary Timothy Geithner praised the widely criticized $700 billion bank bailout of late 2008—known as the Troubled Asset Relief Program, or TARP—as “perhaps the most maligned yet most effective government program in recent memory.” By late 2010, losses to the government had turned out to be far lower than many feared. Since then, the Treasury has been repaid much of the capital it loaned to financial institutions and other firms, even making profits in some cases. The Treasury now reports that losses will finally be close to $50 billion when all is said and done.1

But the program came at an enormous political cost. Many Americans were infuriated by what they saw as a giveaway by the Bush administration to the very banks that caused the crisis in the first place. Reflecting that anger, Congress refused at first to pass the TARP bill, causing a plunge in stock prices. About a week later, with prodding from President Bush and congressional leaders, TARP passed on October 3.

The anti-bailout attitudes among Americans also made the Obama stimulus package of some $800 billion in early 2009 that much harder to pass. To get congressional approval, Obama believed he had to offer tax cuts to the Republicans. The result, many economists argued, was a less potent program than one composed almost entirely of government spending, such as aid to the states and infrastructure investment.

Similarly, the public distrust of government spending to address economic decline made it difficult to return to Congress for a second stimulus, which was badly needed by mid-2009 as the job market collapsed. Trying to fend off criticism of government spending, Obama rarely boasted of the good his stimulus did do, including the creation of at least two million jobs, or even the benefits of TARP and the other government rescue programs. Without a second stimulus, the economic recovery was slow, with an unemployment rate hovering around 8 percent, which so haunted Obama in his reelection bid.

The public’s angry reaction to the bailout of bankers seemed to extend to government intrusiveness of any kind, even the financial reregulation act known as Dodd-Frank, named for its sponsors, Senator Chris Dodd and Representative Barney Frank. Ironically, the TARP reaction may have made it harder to implement tough new regulations on the banks. The TARP bill left to the regulators themselves many difficult decisions that still haven’t been made. Higher capital requirements for financial firms are not yet set, for example. We still don’t have open exchanges for trade in the derivatives that were at the heart of the crisis. The regulation of those highly leveraged investment vehicles based on other securities has been watered down by intense Wall Street lobbying, as has the famed Volcker Rule, which would restrict trading by financial firms for their …

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